HOW to Lower your buy to let mortgage costs
There is some good news for landlords – and it is coming from the mortgage market. Most landlords will be able to lower the costs of their buy to let mortgages if they shop around. Hooray!
How to Lower your Buy to Let Mortgage Costs
Strong competition between lenders on interest rates and a general easing of mortgage company’s previously strict criteria is helping residential landlords get much better deals than have been available for years.
There is lots of choice out there. There are now 2,200 buy to let mortgages on the market – the highest since the crash of 2008.
From 2008 till 2017, most lenders expected a property’s rent to cover 145% of the mortgage payment, whereas before the crash it had usually been just 125%. And some lenders also expected landlords to earn around £30,000 a year, with some even requiring that this income had to be from a non-landlord source.
In the last two years, as competition between lenders has increased, most mortgage companies have eased off such strict requirements – and the more sensible of them no longer need a landlord to have any other personal earnings at all, as long as they can produce 20% or 25% of the investment property value as a deposit.
Lowering your Buy to Let Mortgage Costs Using a Fixed Five Year Term
Also, if you take out a five year fixed term mortgage, many lenders will now “stress test” the interest at a lower rate than the 5.5% interest rate that is more typically used for shorter term fixes and variable mortgage rates.
This means landlords can borrow more and at a higher percentage of property purchase price, which is proving very useful for landlords in more expensive areas, like London and the South East.
The average five year fix is now down to around 3.4%, which compares well with the average two year fix, which is standing at around 2.9%. Mortgage fees, which you pay when the mortgage goes through, do not vary much either between 2 and 5 year terms.
I advise my clients to start shopping around at least three months before any current mortgage deal they are on ends – as remortgaging to a different lender can take some time.
Try to pick a lender which has a free legal service for setting up the new mortgage, if you can.
Other Ways to Lower your Buy to Let Mortgage Costs
If you buy your property through a limited company you do get a major tax advantage in that you can still set off the interest cost in full against the rent, before calculating your profit. (If you buy outside a company set up, tax relief on mortgage and other loan costs is effectively limited to the basic rate).
Carl Bayley, writing in this month’s “Property Investor News” magazine says a company set up usually makes sense for any landlord who either is currently, or expects in the future, to become a higher rate taxpayer. But do make sure to get proper tax advice first to see whether a company set up is best for your own current and future plans.
Landlords who are married or in civil partnerships can buy property in the sole name of the person who is below the tax threshold or who is on the lower tax rate, but still apply for a joint mortgage.
Landlords who are married or in civil partnerships who already own a buy to let jointly can transfer 99% of the ownership to the lower earner without needing to pay capital gains tax or stamp duty land tax. This will have the effect of reducing their income tax overall, whilst keeping the same range of mortgage options open. (There will be capital gains tax consequences of doing this for those who are not married or not in civil partnerships).
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We advise a range of organisations too to help them develop and improve their services and products for private landlords. David Lawrenson, founder of LettingFocus, also writes for property portals, speaks at property events and is regularly quoted by the media.
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